The symbol GBP/USD is what's known in the markets as a currency pair. It's the simple pairing of two different currencies, in this case the British pound and the United States dollar. The currency pair asks a simple question, “How many units of the second currency in the pair can one purchase using only a single unit of the first currency in the pair?” In the world of binary options, traders make predictions as to which direction the answer to this question will go. If they believe that the answer will go up, they purchase call options. Adversely if they believe the answer will go down, they purchase put options. So essentially, in the case of the GBP/USD currency pair, traders would purchase call options if it was believed that the GBP will raise in value faster than the USD. Adversely, if the trader believes that the USD will rise in value faster than the GBP, put options are purchased.
Historic GBP/USD Price Movements
Going back to the year 2005, the GBP was off to a strong start against the United States dollar. While both currencies were growing rather rapidly, the GBP grew faster under strong worldwide economic conditions than the USD; as a result, the pair gained in value relatively quickly. However, this trend was soon to change.
In early 2008, the value of the GBP/USD currency pair started to plummet. As the worldwide financial crisis of 2008 and 2009 started to roll in, the United Kingdom economic conditions didn't fair as well as the economic conditions in the United States. While both currencies started to fall in value dramatically, the British pound fell at a much faster rate than the United States dollar; leading to the decline in the pair.
After the financial crisis, the pair would gain in value relatively quickly as the United Kingdom showed stronger signs of economic recovery than the United States. However, in late 2009, the trend would reverse once again as questions started to rise revolving around the stability of the economy in the United Kingdom. However, in early 2010, those questions were answered and the GBP/USD would grow again. Since then the currency pair has traded relatively flat overall as the United Kingdom and the United States economies would grow at similar rates. While there were peaks and valleys in the pair, overall, it the trend has been sideways. To keep informed about currency fluctuations, you need to follow financial news.
What Causes Movements In The Value Of The GBP/USD Currency Pair
As with any other currency pair, there are three main factors in the movement of the GBP/USD pair. These factors include…
- Worldwide Economic Conditions – In cases where the economy around the world is unhealthy, the United States dollar tends to hold value better than the British pound. So, the value of the GBP/USD currency pair tends to fall rather dramatically.
- Economic Conditions In The United Kingdom – Economic conditions in the UK play a major role in the value of the British pound. When gauging economic conditions in the UK, it's important to remember that the region is comprised of 4 different countries with different sized economies. Therefore, larger economies will impact the currency much more than smaller economies.
Economic Conditions In The United States – Finally, economic conditions in the United States are directly correlated with price movements in the United States dollar. When conditions are good, the USD tends to rise. When conditions are poor, the USD tends to fall. It's also important to keep in mind that the value of the USD changes dramatically when the Federal Reserve changes its monetary policy and interest rates. So, watching the Federal Reserve closely